APRIL 9-10, 2013 MARKETS COMMITTEE Christopher Parent MARKET DEVELOPMENT | Creating a tiered Reserve Constraint Penalty Factor (RCPF) structure for Total Operating Reserves TMOR RCPF & Replacement Reserve

An RCPF for Replacement Reserve of $250/MWh enables re-dispatch in almost all hours annually ISO determined the level of the RCPF through: – Running simulations for the period of January 2011 to December 2012 – Analyzing TMOR pricing from June 2012 to March 2013 Simulations showed an RCPF of $250/MWh maintains Replacement Reserve in all but 7 hours of study period 2 System TMOR Shadow Price 5min Interval Count Approx HoursPercent Cumulative Pct $1 to $ % $101 to $ %85% $201 to $ %89% $251 to $ %90% $301 to $ %96% $401 to $ %100% Total % Historical pricing of TMOR since 6/1/2012 shows that $250/MWh covers almost 90% of past redispatch scenarios (80 hours total)

Conceptual Reserve Demand Curve 3

Planned Impact Analysis of the increase for the Replacement Reserve Requirement Evaluate the impacts of increasing the total operating reserve requirement by the new Replacement Reserve amount in the day-ahead and real-time markets – This analysis would use previous increases in Ten-Minute Reserves (TMR) as the baseline Evaluate the impacts of increasing the TMOR requirement in the Forward Reserve Market – This analysis would use previous increases in TMR as the baseline 4

Proposal Summary and Schedule Replacement reserve will be used in place of normal supplemental commitment in real-time, included in the day-ahead market and purchased in the FRM The replacement reserve requirement will have a different RCPF ($250) than the minimum 30-minute reserve requirement ($500) 5 CommitteeActionDate Markets CommitteePresent ProposalMarch-2013 Markets CommitteeTariff Language ReviewApril-2013 Markets CommitteeImpact AnalysisMay-2013 Markets CommitteeVoteMay-2013 Participants CommitteeVoteJune-2013 These changes are expected to go into effect for October-2013

APPENDIX Material previously presented at the February-2013 Reliability Committee and March-2013 Markets Committee

Using Replacement Reserve in place of Normal Supplemental Commitment The system will be operated to meet a replacement reserve (RR) requirement starting on October 1, 2013 – This requirement will be included in in the Forward Reserve Market (FRM), Day-Ahead Market, RAA/SCRA and Real-Time – Replacement reserves (RR) can be met by resources providing ten or thirty minute reserve capability Having an increased reserve requirement will reduce the need to use supplemental commitments under normal operating conditions – The system will be committed to meet load plus reserves – This is expected to improve real-time price formation 7

Replacement Reserves reflect a relatively small change to the Total Reserve Requirements The replacement reserve requirement will be set at 180MW during Eastern Standard Time periods and 160MW during Daylight Savings Time periods. – Higher level set for winter period due to higher instantaneous loads and fuel uncertainties – Based on off lines studies to determine levels to offset routine supplemental commitments – Levels will be evaluated following each period and adjusted as required Higher requirement will be used in the Forward Reserve Market when there are multiple requirements within a season 8

Available Reserves above Requirement All Hours:

Available Reserves above Requirement Peak Hours:

Pricing Total Operating Reserve Requirement differently than Minimum 30-Minute Reserve Requirement In real-time, the replacement reserve requirement will be met by the same products as today (i.e., TMR, TMOR), but the ISO is proposing to create a discrete replacement reserve RCPF (i.e., multi-tiered demand curve for 30-minute reserve capability) – Resources in real-time will be redispatched to meet the total operating reserve requirement, helping to ensure capability is available to manage uncertainties that may materialize within the operating day Operations will not take emergency actions to maintain the replacement reserve requirement; rather using these actions to maintain only the minimum 30-minute reserve requirement – When operations takes emergency actions, the replacement reserve constraint is expected to remain violated meaning that the real-time reserve price would be minimally the RCPF associated with replacement reserve 11

Current Conceptual Reserve Demand Curve 12

Proposed Conceptual Reserve Demand Curve 13